Ottawa preparing to go toe-to-toe with U.S. to subsidize EV battery production in Canada

The federal government is preparing to transform its industrial policy in a bid to shelter Canadian production of electric vehicle batteries from the threat posed by the United States' offer of billions of dollars in new subsidies, sources say.

For the first time, Ottawa is set to subsidize the production costs of large electric vehicle battery producers. It hopes to convince them to set up their plants in Canada, or to maintain their presence here.

The new measures would be a game-changer for Canada's industrial policy. For decades, government programs have been based on funding "non-recurring" capital expenditures, such as the construction or modernization of factories.

Under the new subsidy model, Ottawa would fund the operating expenses of battery and battery component producers through subsidies tied to the number of units produced. Although the details are still in the works, those operating expenses could include variable costs like labour or production materials.

This would allow Canada to compete with the new measures put forward in an American law adopted this summer called the Inflation Reduction Act — which, according to experts, poses an unprecedented threat to the Canadian industry.

A senior Canadian source — who was not authorized to comment publicly on the topic — confirmed that the goal in Ottawa is to "do like the United States" for "some big projects."

"There are some major deals on the table," said this source.

Sources said the federal government already has delivered a clear message to a handful of multinational firms — that Canada will enhance its existing financing programs with "production support" measures.

Most of the current efforts are the responsibility of Innovation Minister François-Philippe Champagne, who has just completed a series of meetings in Asia and Europe with large carmakers, including Volkswagen, Mercedes-Benz and BMW.

Behind the scenes, the government has made it clear the new strategy is endorsed by Prime Minister Justin Trudeau. 

One of Trudeau's senior advisers, Ben Chin, accompanied Champagne to South Korea in November. They met with leaders from Hyundai and other companies linked to the electric battery sector, such as Samsung, LG, SK IE Technology and POSCO.

The new strategy could be unveiled in the 2023 budget. Finance Minister Chrystia Freeland will have to approve the spending — but she has said already that the government won't let Canada's high-tech industries down.

For now, Champagne is being careful not to say too much.

He recently asserted that Canada has many advantages in the EV battery sector — including a skilled workforce, access to international markets and, above all, clean energy — and he won't let the Americans beat Canada on government subsidies.

"We intend to remain competitive with what the Americans have put forward," he said Monday.

A senior federal official added the policy work on Canada's response to the Inflation Reduction Act is ongoing and would target only a handful of companies in the EV battery sector.

U.S. subsidies remain a concern

The Canadian approach is a direct response to the measures contained in the Inflation Reduction Act, a $369 billion US program that offers a series of subsidies and preferential measures to American companies building electric cars, among others.

The Trudeau government breathed a sigh of relief when the final version of the law extended preferential subsidy treatment to cars assembled in Canada and Mexico.

But subsidies granted in the Inflation Reduction Act to the U.S electric battery sector remain a huge source of concern in Canada. Critics are especially alarmed by section 45X of the law, which offers tax credits to subsidize the production of electric battery components over the next decade.

A consultant who works on the green economy in Canada said several companies are now calculating subsidies that may be available in the United States. Even a company that already has promised to invest in Canada is reassessing the situation in light of the Inflation Reduction Act, said this source.

"People are calculating the benefits they would receive in the United States," he said.

Several groups are lobbying the federal government to respond to this threat to the Canadian industry.

Brendan Sweeney, a Canadian auto industry expert with the Trillium Network for Advanced Manufacturing, said the precise impacts of the Inflation Reduction Act will have to be defined over the coming months.

Even so, he said, there will be "billions and billions" of dollars in new subsidies for electric battery companies setting up shop in the United States — enough to disrupt the industry globally.

"[The Inflation Reduction Act] provides the United States with a competitive advantage that is very expensive to the United States in one segment of the supply chain that Canada is hoping to grow in," Sweeney said.

Evan Pivnick, a renewable energy sector expert at Clean Energy Canada, said Canada should not seek to out-compete the Americans on corporate subsidies.

He pointed to the fact that many companies place a high value on clean electricity from Quebec. The power supply in some U.S. states comes from coal-fired plants.

At the same time, he said, he understands the Canadian government's efforts to preserve its considerable momentum in the electric battery sector, after having attracted major investments in Ontario and Quebec.

"I wouldn't be surprised to see hard-fought investments that have landed here in Canada to date, and ones that are on the table, that they would go to great lengths to secure them … This is an incredibly important industry to the broader energy transition that is taking place," Pivnick said.